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Is there an alternative to nationalising Northern Rock?

Tuesday’s announcement that the Treasury will guarantee lending from other banks to Northern Rock is last ditch bid to avoid having to nationalise the bank. But in truth, most of the best options were closed off by inaction back in September.

18 December 2007

2:27 PM

18 December 2007

2:27 PM

Tuesday’s announcement that the Treasury will guarantee lending from other banks to Northern Rock is last ditch bid to avoid having to nationalise the bank. But in truth, most of the best options were closed off by inaction back in September.

National Rock? With the announcement this morning of a further extension of the scope of the Treasury’s guarantee of Northern Rock liabilities, nationalization of the crippled mortgage lender looks an even stronger bet than it did yesterday.

The guarantee, you may remember, initially covered only the £24 billion or so of retail deposits made before everything went pear-shaped and panic-stricken in September. Then the guarantee was extended to cover new deposits after that date and some wholesale deposits. Meanwhile, the taxpayer lent Northern Rock £25 billion via the Bank of England to make up for its inability to attract funding from the interbank market. Now – more than a month after the deadline for private-sector bids to take over the Rock, but with no evident progress on that front – a new guarantee has been put in place to cover ‘uncollateralised and unsubordinated wholesale deposits, payment obligations under derivative trades, and payments under Northern Rock’s Granite mortgage securitisation programme’.

That’s quite a mouthful: the Treasury says it refers only to some ‘hundreds of millions’ of additional liabilities, rather than tens of billions, but no one seemed entirely sure. What the news clearly does tell us, however, is that the Rock story is still moving in the wrong direction as far as the government is concerned.


If money markets were functioning normally, any of the three prominent potential buyers of the Rock could have shaped up by now as credible new owners: Sir Richard Branson, already named as ‘preferred bidder’, offers the strength of the Virgin brand and, love it or hate it, his own personal pizzazz; the consortia led by the US investment firm JC Flowers and the ex Abbey boss Luqman Arnold both offer serious money and serious people.

But today’s other news story – of the Bank of England pumping another £11 billion into the markets as part of a concerted effort by central banks around the world to stave off a liquidity crunch that could drive a global recession – tells us why the takeover talks have gone quiet. The money market is in a state of semi-paralysed fear, making banks and depositor institutions unusually reluctant to lend even to banks that are still in the category of ‘undoubted’: hence, while the Bank of England has cut its base rate from 5.75 per cent to 5.5 per cent, ‘Libor’, the London interbank offered rate, has effectively disconnected itself from the Bank’s signalling system and has been up as high as 6.6 per cent.

In these circumstances, there is frankly no hope of Northern Rock being able to return to business as usual without an all-embracing Treasury guarantee extending for the foreseeable future. And if the political imperative behind the ‘auction’ process that produced Branson, Flowers and Arnold is to find a solution which gets the taxpayer off the guarantee hook as quickly as possible, thereby allowing Gordon Brown and Alastair Darling to declare that they have confounded their critics and successfully managed their way out of the crisis – well, it just isn’t going to happen, is it? And they know that, which is why there have been carefully-inserted references to ‘all options’ on the table, the options of nationalisation or painful winding-up being the only other ones they’ve got.

And of if nationalisation would be an abiding embarrassment for the government, then the truly last resort of closing down Northern Rock – despite the guarantees, despite months of talks with potential bidders – could be a catastrophic loss of credibility. I certainly wouldn’t want to spend Christmas Day with Treasury’s Northern Rock crisis-management team, what with Gordon smouldering at one end of the table, Alastair staring glumly at his sprouts at the other and, allegedly, Shriti Vadera bursting in from time to time to shout at all of them.

But what can anyone now suggest to them as a positive alternative? This is a saga which has its own very particular momentum: most of the sensible options were closed off long ago, before the queues started to form in mid-September. Saying ‘if only…’ – if only the FSA had intervened in July, if only the Bank had acted decisively in August, if only both of them and the Treasury had given Lloyds TSB a free hand to buy the Rock in early September – gets us nowhere. And there are now no possible solutions which do not imply pain for Northern Rock shareholders.

Nevertheless I wonder whether one last try at an old-fashioned Bank of England-led settlement would be worth trying: summon the chief executives of Britain’s dozen largest surviving mortgage lenders to Threadneedle Street, shut them in a room together with a large tray of coffee and sandwiches, tell them the Treasury guarantee has to come off within 12 months, and order them not to come out until they have worked out a formula either to take over Northern Rock between them, with all of them as shareholders in proportion to their size – or if it’s more practical, to parcel out its mortgage assets and deposits between


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